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Global Economy and China's Economy in 2021

Global Economy and China's Economy in 2021

Global Economy and China’s Economy in 2021 Liqing Chief Economist of PwC China and Professor of the Central University of Finance and December 2020

Global Economy and China’s Economy in 2021 Content

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Uncertain and unbalanced global Significant risks to global finance in the Opportunities and challenges facing economy recovery post COVID-19 China’s economy in 2021

Global Economy and China’s Economy in 2021 Uncertain and unbalanced global economy recovery

Global Economy and China’s Economy in 2021 Uncertain and unbalanced global economy recovery (1)

In April 2020, IMF substantially cut its IMF DataMappar Real GDP growth (Annual percent chage, 2020) growth forecasts for 2020: • Global economy would shrink by 3% in 2020 (IMF forecasted 3% growth at the beginning of the year) • Global economy would suffer from the worst recession since the “Great Depression”. • Nearly 90% of the recorded negative growth, the most extensive economic recession in the past 150 years.

6% or more 3%-6% 0-3% 90% -3%-0 less than -3% of the countries no data recorded negative growth Source: IMF, 2020, World Economic Outlook (April 2020)

Global Economy and China’s Economy in 2021 4 Uncertain and unbalanced global economy recovery (2) Critical factor: COVID-19 The situation is still severe; China, , the US and other countries are speeding up vaccine development, which is expected to make a difference.

Trend of domestic/overseas newly confirmed cases Domestic Unit: case Overseas

Domestic/Overseas newly Overseas cumulative Overseas cured confirmed cases cases/existing cases/deaths confirmed cases

Global Economy and China’s Economy in 2021 5 Uncertain and unbalanced global economy recovery (3)

According to IMF forecast in : • would shrink by 4.4% due to COVID-19, 4.3% for the US, 8.3% in , and 3.3% for economies (EMEs), while China was expected to have a 1.9% growth. These forecasts were raised except that for EMEs. • At least 90 countries may come to a financial crisis. • A strong rebound in 2021 was probable (due to a low base).

10.0 (%) 8.0 8.2 8.8 7.2 6.0 6.0 6.2 5.2 5.2 5.2 5.9 5.2 3.9 4.2 3.6 3.9 3.6 5.0 3.1 2.8 2.8 3.5 3.0 3.1 3.1 3.0 2.3 5.5 6.1 1.7 1.3 1.5 2.0 1.5 1.7 1.9 4.9 0.6 0.3 3.7 4.2 1.3 1.1 -0.3 0.3 2.8 1.7 2.2 1.7 2.1 3.2 0.2 0.0 2.2 0.7 1.4 -3.4 -4.1 0.0 -3.0 -1.7 -5.0 -5.3 -3.8-3.3 -4.4 -4.3 -4.6 -4.1 -4.3 -5.8 -6.0-9.8 -5.8 -5.4 -7.1 -10.0 -8.1 -8.0 -8.3 -9.0 -9.8 -10.6 -10.3 -15.0 -12.8

2019 2020 Projections 2021 Projections

Global Economy and China’s Economy in 2021 Source: IMF, 2020 6 Uncertain and unbalanced global economy recovery (4)

• The world economy growth is expected to shrink by 4.2% this year as a result of COVID-19, better than that projected in and . • The global economy may grow by 4% on average over the next two years. The global GDP growth is projected to be at 4.2% in 2021 (down from 5% estimated in September) and 3.7% in 2022. • By the end of 2021, the global economy may recover to pre-COVID-19 levels.

The latest forecasts released by OCED in December

5.0% 5.1% 7.6% 8.0% 10.0% 4.0% 2.3% 4.2% 3.2% 3.6% 4.2% 1.8% 5.0% 1.5% 2.8% 0.0% -5.0% -3.7% -4.2% -5.3% -5.5% -10.0% -4.5% -3.8% -7.5% -5.8% -7.9% -10.1% -15.0% -11.2% World US Euro Area UK China

Economic growth forecast for 2020(Latest forecast) forecast for 2020(Previous forecast) Economic growth forecast for 2021(Latest forecast) Economic growth forecast for 2021(Previous forecast) Note: Previous forecasts for China and Germany not available. Source: OECD Global Economy and China’s Economy in 2021 7 1. Uncertain and unbalanced global economy recovery (5)

Relatively optimistic forecasts by Goldman Sachs

Real GDP 2019 GS 2020(f) GS 2020(f) GS 2020(f) Growth Percent Consensus Consensus Consensus Change yoy

US 2.2 -3.5 -3.9 5.3 3.8 3.8 2.8

Japan 0.7 -5.3 -5.6 3.3 2.5 2.0 1.5

Euro Area 1.3 -7.2 -7.7 5.3 5.2 4.3 2.6

Germany 0.6 -5.8 -5.8 3.7 4.4 4.2 2.7

France 1.5 -9.2 -9.5 7.0 6.6 4.7 2.7

Italy 0.3 -8.7 -9.8 6.0 5.5 3.6 2.6

Spain 2.0 -11.6 -12.0 7.1 6.4 6.4 4.3

UK 1.3 -10.5 -10.0 6.1 5.5 7.3 2.9

China 6.1 2.0 2.0 7.5 8.0 5.7 5.4

India 4.9 -8.9 -9.0 10.0 7.4 7.2 6.9

Russia 1.3 -4.0 -4.0 5.0 3.0 3.0 2.3

Brail 1.1 -4.6 -5.2 4.0 3.5 2.9 2.5

World 3.0 -3.9 -4.0 6.0 5.2 4.6 3.7

Note: All forecasts calculated on calendar year basis. IMF forecasts used for 2022 consensus when quarters not available in Bloomberg. Source: Bloomberg, Goldman Sachs Global Investment Research Global Economy and China’s Economy in 2021 8 Uncertain and unbalanced global economy

recovery (6) Favourable factors: Adverse factors: • Owing much to the implementation of • Many countries are still going through Basic judgements: substantial relief programs, pandemic rebound which will have • Economic recovery is likely to come enterprises or market entities in most negative impact economic recovery. economies have managed to survive. despite its uncertainty; • A of vulnerable groups, Recovery in investment confidence • Based on existing indicators, there enterprises and countries are still may immediately boost the economic will be a strong rebound in 2021 experiencing uncertainties, and such recovery. (from an optimistic but prudent continuity will expose them to greater perspective, global GDP may shrink • The fiscal relief expenditure will be economic losses. by less than 4%), and the economy increased by at least USD 1 trillion • The economic consequences caused will be back to normal (i.., pre- after Biden takes office. by the pandemic will exert lasting pandemic level) in 2022; and • The epidemic is likely to be controlled effects in the coming years. • Recovery will be different in rapidly after COVID-19 vaccines are countries/regions, while China will phased into common use. still lead the world in economic • The accelerated recovery of China’s recovery. economy and global efforts on epidemic control will boost market confidence and promote global economic recovery.

Global Economy and China’s Economy in 2021 9 Significant risks to global finance in the post COVID-19 world

Global Economy and China’s Economy in 2021 International financial risks in the post COVID-19 world (1): Another sharp fall in the stock market

Triggers include: • The significant V-shaped rebound in the stock market is in sharp contrast to the recession in the real economy, indicating an obvious bubble in the market. − S&P 500 has increased by more than 60% since ; − Buffett: the bubble is larger than that in 2000. • Factors triggering another sharp fall include: − Economic growth shrinkage resulting from further outbreaks far outstripped expectations. − frictions and geopolitical conflicts are getting more intensive; − The Democratic Party has made a major adjustment to the economic policies after they won the US ; Source:S&P Dow Jones Indices LLC − The market is adjusting itself under the influence of external factors.

Global Economy and China’s Economy in 2021 11 International financial risks in the post COVID-19 world (2): A substantial devaluation in USD

The extreme monetary and fiscal policies, especially unlimited quantitative easing of the US in response to the impact of the COVID-19 will raise concerns among investors about the medium and -term prospects for economic growth. • M2 increased by 20%; FED’s balance sheet increased from USD 4 trillion to 7 trillion. • According to the Congressional Budget Office, the deficit of the Federal Government of the in 2020, as a proportion of (GDP) may soar to record high of 17.9% during peace period. • In Q1 2020, net national savings fell to 1.4% of national income. This is the lowest record since late 2011, only accounting for a fifth of the average (7%) between 1960 and 2005. • Cyclical inflation and asset bubbles.

Global Economy and China’s Economy in 2021 12 International financial risks in the post COVID-19 world (2-1): A substantial devaluation in USD

USD Index: 1976-2019 Hit the bottom?

Source: macrotrends

Global Economy and China’s Economy in 2021 13 International financial risks in the post COVID-19 world (3): Monetary and financial crisis in emerging markets

• The centre of the outbreak has shifted to EMEs (GDP growth has been largely revised downward this year); IMF estimated that EMEs would need at least USD 2.5 trillion in 2020 coping with the pandemic. − There are no sufficient resources for the financial safety net, and it has obvious institutional flaws in some ways. − Without the support of sufficient liquidity, EMEs are likely to go through a monetary and financial crisis. • If global financial markets were to be volatile again, the USD exchange rate should inevitably fluctuate dramatically. − EMEs will undertake great pressure if the index rises dramatically in the short term (in March, most emerging markets experienced a significant devaluation in due to continuous financial upheavals in the US market and the sharp rise in US Dollar index). The USD appreciation will bring more debt burdens to EMEs; − After the instabilities get controlled, the USD will become devalued. If the USD continues to weaken, some EMEs may have difficulties in their export activities and thus may suffer from debt crises.

Global Economy and China’s Economy in 2021 14 International financial risks in The development of the Great Depression between 1929 and 1933 the post COVID-19 world (4): Crisis in international banking

• The past financial crisis indicates that economic recessions are generally followed by a banking crisis (a typical example: the Great Depression between 1929 and 1933). • An outlook on the ROE (Return on Equity) of in 9 developed countries shows that these countries are expected to have a significant decrease in ROE over the next few years, according to the Global Financial Stability Report (GFSR) ROE of banks in certain developed countries: 2018-2025 released by IMF. The ROE of many systematically important banks may decrease to 4% in 2025, while that of the rest may be up to 8%; in low-interest-rate countries, 60% of banks will have an ROE of 4%. • Can banks maintain a stable ROE without interruption?

The ROE of many systematically important banks may decrease to

4%in 2025 Source: IMF, GFSR, 2020, April

Global Economy and China’s Economy in 2021 15 Opportunities and challenges facing China’s economy in 2021

Global Economy and China’s Economy in 2021 Opportunities and Highlights: challenges facing China’s economy in 2021

• China’s economy managed to realise a V-shaped rebound in 2020, and China is the only major economy for which GDP is projected to rise. Industrial output rebounded With respect to the sector, fastest with growth in Q2, among the output of information − There was a 6.8% shrinkage in Q1, and a 3.2% and 4.9% which output from high-tech transmission, software and growth in Q2 and Q3 respectively on a year-on-year basis. If grew significantly on information technology services there will be a 5.5% increase in Q4, the yearly growth is a year-on-year basis. as well as financial industry expected to be 2.1% (forecasts after October are between increased rapidly. 1.8% and 2.3%). In 2021, the growth rate may be up to 8% or above due to the lower base; in 2022, the growth rate may return to normal, reaching approximately between 5.5% and 5.7%. − Investment increase in fixed assets made major contribution to such improvement and the growth rate is expected to be 3.5% accumulated growth rate. Total sales of consumer goods Retail consumption has been New commercial activities are may reduce by 4.4% for the year. Exports are doing better than gradually improved, with significant developing rapidly, including expectations, growing by about 1.8%. growth in online consumption, online , medical care accounting for more than 25% of the and office, which may show a total retail sales of consumer goods. regular growth.

Growth shrinkage in trade of goods Foreign capital inflows recorded was below expectation, and the net growth, and the RMB had export of medical materials, steadily strengthened. medicines, etc. significantly.

Global Economy and China’s Economy in 2021 17 Opportunities and challenges facing China’s economy in 2021 (2)

Outlook ’s economic policies in 2021 • Implement the Proposals of the 14th Five-Year Plan and accelerate the establishment of a "dual circulation" − “Dual Circulation" development will be a long-term strategy • Retain most of the economic stimulus policies − Fiscal policies are likely to remain relatively lenient and the fiscal deficit-to-GDP ratio may remain above 3%; − Monetary policies may return to normal (the growth rate of M2 may decrease from 10.4% to 9% this year; social financing may be reduced from 13.5% to 12%); − Strengthen supervision to prevent systematic financial risks. • Maintain a relatively high investment growth rate, and continue to push ahead with the “new and new urbanisation initiatives and major projects” • Deepen reform, energise the market and continue to improve the environment to enhance the confidence of domestic and overseas investors • Support expansion of high-quality opening-up to avoid “decoupling” from the developed countries; remain committed to promoting reform through opening-up

Global Economy and China’s Economy in 2021 18 Opportunities and challenges facing China’s economy in 2021 (3)

Changes in domestic industrial structure in 2021 and potential opportunities. • New technological revolutions in , new energy sources, new materials, etc.; • Economic and trade friction; import substitutions as result of global supply chain transformation ((semiconductors, auto parts, etc.); • Online economy; • New urbanisation. "Opportunities in crisis" from the slow recovery of global economy, low (negative) interest rates in developed countries, Sino-US economic and trade frictions. • Net capital inflows and financing opportunities; • Return of US-listed Chinese shares and acquisition of quality assets; • RMB internationalisation; • Oversea investments.

Global Economy and China’s Economy in 2021 19 Opportunities and challenges to China’s economy in 2021 (4)

Significant risks to China’s economy in 2021: • The pandemic may continue to expand globally, making it difficult for some countries to recover from economic recessions. • The recovery may stagnate as major economies have prematurely scaled back their relief and stimulus efforts. • Risks are rising in global financial markets. • Sino-US economic and trade frictions could remain and US embargo of foreign technology may escalate further. • The excessive inflow of foreign capital will lead to the rapid appreciation of the RMB and the expansion of asset bubbles.

Global Economy and China’s Economy in 2021 20 Contact us

Professor Liqing Zhang Thomas Leung Elton Xing Zhou PwC China Managing Partner Managing Partner Managing Partner Chief Economist – Markets, – Central Markets, – North Markets, Tel: +86 (10) 6533 2113 PwC China PwC China PwC China Email:[email protected] Tel: +86 (10) 6533 2838 Tel: +86 (21) 2323 3029 Tel: + 86 (10) 6533 7986 Email:[email protected] Email:[email protected] Email:[email protected]

Global Economy and China’s Economy in 2021 21 This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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